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I am considering purchasing a small office complex that will generate a gross in rents of $600,000 per year. Because of lont-term leases, rental income is not expected to change over the next 20 years. Next year, expenses will be $200,000. Thereafter, however, expenses are expected to grow with inflation at 4% per year. Investors usually demand a 10% (nominal) rate of return on such investments. In 20 years, I could sell the apartment complex for $2 million (which includes the effects of 20 years' inflation). Ignoring taxes, how much should I be willing to pay today for the office complex?

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Solution Summary

A small office complex generating rent is determined. Taxes on the office complex is examined.

Solution provided by:
Gaurav Agarwal, MS
Education
  • BE, Bangalore University, India
  • MS, University of Wisconsin-Madison
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